When you feel like you are backed into a corner and not sure what your next move should be, bankruptcy may sound terrifying. But the intention of bankruptcy is a noble one — one that hopes to move you from a place of feeling overwhelmed by debt to a place of financial stability.
1) What is a Bankruptcy Exemption?
Bankruptcy exemptions allow you to keep a certain amount of your assets safe while filing for bankruptcy. Things like cars (typically inexpensive cars), tools you need for work, furniture, and retirement accounts are all considered exempt, up to a certain amount. Each exemption category has a limit to what you can keep, and it changes state-to-state.
We built the following bankruptcy exemptions calculator to help you estimate whether you are at risk of losing your belongings. The calculator uses your state's bankruptcy exemptions.
2) Understand Bankruptcy Exemptions
Exemptions in Chapter 7 bankruptcies protect your assets from liquidation. As mentioned earlier, in Chapter 7 bankruptcy, the court puts a trustee over everything you own. Their goal is to liquidate, or sell, whatever is possible to help pay off your creditors before dismissing the debts. However, exemptions protect certain things from liquidation.
When you file for a Chapter 7 bankruptcy, the court requires you to list anything and everything that you own. This becomes the ‘estate’ that the trustee will take over. The trustee has the right to sell or liquidate almost anything that is valuable to pay off your creditors when the value is above the exemption.
The following are some bankruptcy exemptions:
Motor Vehicles (up to a certain dollar amount)
Reasonably necessary clothing
Reasonably necessary furniture
Jewelry (up to a certain dollar amount)
Tools (used for work, trade, or up to a certain dollar amount)
Damages awarded for personal injury
Equity in the debtor’s home (up to a certain dollar amount)
Unpaid but earned wages (up to a certain percentage)
Public benefits received
As seen above, there are certain exemptions that are more detailed than others, especially if the asset is exempt up to a certain amount or percentage. An example of partial exemption maybe something like your car. If your state allows a $5,000 exemption for a vehicle, and your car is valued at or under that valuation, then you can keep the car. However, if your car is worth $10,000, it is well over the exemption limit and the trustee would be able to liquidate your car to pay the creditor.
3) Bankruptcy Exemptions By State
See the bankruptcy exemptions by state below to understand the bankruptcy exemptions for your state.
4) How Are Does Chapter 13 Bankruptcy Help Protect Non-Exempt Assets?
Chapter 13 Bankruptcy differs from Chapter 7 bankruptcy. Instead of trying to sell everything to pay off creditors if equity is above the exemption, with Chapter 13 bankruptcy, your goal is to pay off creditors over a longer period of time while keeping what you own.
This means that you may be able to keep your home or car regardless of the homestead exemption.
When you file for a Chapter 13 bankruptcy, one of the first and most important steps is determining what all you own, the amount of money you make, and how much you owe to creditors. Figuring out these things is what determines how much you will pay back to creditors each month.
5) Things Specifically NOT Exempt
While there are a lot of things covered under exemptions for both Chapter 7 and Chapter 13 bankruptcies, there are many other things that are specifically non-exempt. This can range widely based on your location, what type of bankruptcy you are filing, and what your total assets are. Things like luxury items, second homes, and more may be non-exempt and can either be liquidated to pay off creditors or added to your disposable income total.
6) State and Federal Exemptions
When filing for bankruptcy, it is important to note that there are two sets of exemption laws. The state exemption is what your state offers as an exemption. These do not have to match your federal bankruptcy exemptions, which is the exemption offered nationally. There are some states where you can use federal bankruptcy exemptions and other states where you cannot.
Here are the states that allow you to use federal bankruptcy exemptions:
District of Columbia
States that allow you to use federal bankruptcy exemptions
For instance, Texas may have an excellent homestead exemption, so if you are a Texan, it may be worth filing under the state exemption. Comparatively, New Jersey has pretty strict exemptions, which is why a lot of New Jersey residents may find themselves filing under federal exemptions. Make sure you work together with your legal representation to figure out which exemption works best for you!
How Does Bankruptcy Work
Bankruptcy is a legal court proceeding where a judge and bank trustee oversee and manage the financial situation of an individual. Typically, you decide to declare bankruptcy when you are no longer able to continue paying off the debt you have incurred. There are many reasons why this might happen. Unemployment, divorce, overwhelming medical bills, and excessive credit card debt are just a few of the many reasons people find themselves needing to file for bankruptcy.
There are a few different types of bankruptcy. Two of the most common forms are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy tends to be more intense. The court liquidates your assets to pay off your debt. But you tend to go through the process relatively quickly, and you come out with considerably less debt than when you start. Chapter 13 bankruptcy is for people who can continue to make payments on their debt but need help lowering their payments and extending their payout schedule.
Both forms of debt can be helpful in different situations, but both can also be intimidating. One of the common misconceptions about filing for bankruptcy is the thought, “I will lose everything!” This can be a nerve-wracking thought, especially in such a high-stress situation. Fortunately, this may not be as accurate as you think.
When filing for bankruptcy, you do have to give control of your financial situation to someone called a bankruptcy trustee. Depending on what kind of bankruptcy you file for, the trustee is either in charge of liquidating your assets and paying down your debts, or they meet with you and your creditors to find a suitable payment plan that works for everyone involved. Because they take charge of your financial situation, it may feel like you will lose everything you have. Fortunately, there are Exemption Laws that allow you to maintain some of your assets, even when you file for bankruptcy.
Can You Keep Your Home or Vehicle Using Bankruptcy Exemptions?
Each state has various bankruptcy exemptions. As such, you can use the following bankruptcy exemptions calculator to estimate whether you are at risk of losing belongings.